Rent? Buy? How about rentvesting?
Owning a home is considered a big part of the great Australian dream. However, with the ever-increasing prices of real estate, it has become extremely difficult for many Australians to gain a foothold in the property market, let alone being able to buy in an area where they want to live.
As a way of both owning property and living in a desired location, Aussies are increasingly adopting a practice known as ‘rentvesting’.
What is rentvesting?
Rentvesting is the practice of living in a rental property while simultaneously renting out an investment property that you own. Rentvesters typically rent property they want to live in (but can’t afford to buy) and buy property they can afford (but don’t want to live in) and rent it out as an investment property.
For example, if your dream home is a three-bedroom home situated close to or within the the city fringe, the prices are usually quite high and you may not be able to afford it.
Variable rate home loans for investors
Base criteria of: a $400,000 loan amount, principal and interest (P&I) home loans with an LVR (loan-to-value) ratio of at least 80%. If products listed have an LVR <80%, they will be clearly identified in the product name along with the specific LVR. The product and rate must be clearly published on the product provider’s web site. Introductory rate products were not considered for selection. Monthly repayments were calculated based on the selected products’ advertised rates, applied to a $400,000 loan with a 30-year loan term. Rates correct as at 18 May 2020. View disclaimer.
Essentially, you are splitting out the two factors of ‘property affordability’ and ‘quality of living’ and trying to optimise each one without having to deal with the baggage of the other!
But is rentvesting a good idea? Here are some key points to think about:
The benefits of rentvesting
1. Your purchasing power doesn’t affect the lifestyle that you want
Rentvesting makes it possible for you to live your preferred lifestyle or quality of life and at the same time, get onto the property ladder and create an extra income stream.
The rapid growth in property values across the broader market in Australia over the past decade has not been matched by rental growth. Due to this, gross rental yields (eg. annual income as a percentage of the property value) have declined to a level that is around 3% p.a for housing (averaged across Australia). This has been a key driver of the rentvesting trend simply because the effective cost to rent a property has fallen below the cost to own the same property.
A partly renovated house located in a sought-after area within a 6km radius of an Australian capital city is valued at $750,000. With annual interests costs of $27,000 (4.5% on a $600,000 loan) and annual ownership costs (for insurances, maintenance and council rates, etc…) of $6,000, total annual holding costs equate to around $635 per week. Using the average gross rental yield of 3% p.a as a guide, the same house would cost you around $430 per week to rent.
2. Rentvesting can help you buy a property sooner
Since rentvesting allows you to buy a property purely from an investment perspective (eg. a focus on capital growth and rental yield – as opposed to ‘how much you love the property’ from a quality of life perspective), it’s likely you’ll be able to get onto the property ladder quicker.
This is because you can target properties which are substantially cheaper than your dream home, so you’re not required to save up as much for a deposit. Also, since the properties are cheaper, the 20% deposit required to avoid Lenders Mortgage Insurance (LMI) is more within reach, so you’re a better chance of both avoiding LMI altogether as well as negotiating a better interest rate from having an LVR (loan value ratio) of 80% or less.
3. Buying an investment property offers tax advantages
One of the biggest advantages of rentvesting is that all of the expenses associated with your investment property are tax deductible (eg. home loan interest payments, property maintenance, insurance, council rates, depreciation, etc). So if for some reason your property investment makes a loss (i.e. the expenses are more than the gross income from rent), you can leverage those losses to reduce your taxable income from your own salary. Take note that Savings.com.au always recommends to people that for any matter relating to taxation, they should talk to a professional for qualified advice.
Some property investors actually set up their property investments to make losses so that they can leverage these against other incomes which are taxed at top marginal rates (eg. 47-48%+). This is known as negative gearing. While it sounds like a clever way to minimise tax, this strategy assumes investors are able to service the home loan debt and other expense commitments and that the value of the property will increase over time (why else would you make a loss on an investment?).
4. You are more likely to make a smart decision when purchasing a property
Buying a home usually comes with a lot of emotions since it’s your dream and you already have a picture in your mind of the kind of life that you and your family will have when you live in the house. On the other hand, buying an investment property doesn’t come with the same level of emotional engagement – you’re likely to be more focused on a property’s potential return on investment (ROI).
So, is rentvesting a good idea? It really depends on your goals and the level of sacrifice you are willing to make to get ahead in life. If living within 5km of the city is a must for you so that your commute to work is less than 15mins and you’re surrounded by your favourite restaurants and coffee shops, then rentvesting can be a valid route to get you onto the property ladder without greatly sacrificing your aspirational quality of life.
However, if you are hell-bent on building your future position as quickly as possible and are willing to make material sacrifices in your quality of life to do so, you are just as likely to build your future position through buying a property in an area where you can afford it, and living in it. If this property grows in value over time, you will not pay any capital gains tax from its sale, whereas the sale of an investment property (as part of your rentvesting strategy) will attract capital gains tax which will, in turn, eat into any profits that you make from its sale.
Frequently asked questions
1. How to start investing in rental properties?
There are many steps involved in starting to invest in property, but one key step you can't overlook is planning. Property investment is a huge financial commitment, and your portfolio should be something that will make you wealthy down the line, so take the time to properly research the house you're buying.
Consider consulting a financial adviser or mortgage broker if you need help getting started in property investing.
2. How to buy multiple investment properties?
If you already own a house, investment or otherwise, you can use the equity in your 1st property to buy a second property. By building up substantial equity, you can then refinance your home loan to put down a deposit on a second property. You could do this multiple times over the years to build a strong property portfolio.
This is just one strategy you can employ - see our article on this topic for more information.
3. What home loan is best for investment property?
There's no one 'best' home loan for investment properties - there are hundreds of home loan products available for investors right now. But generally, a good home loan for an investment property should have:
- A low, competitive interest rate
- Interest-only and line of credit loan options
- The ability to 'split' your rate between variable and fixed
- Low upfront and ongoing fees
- An offset account attached
4. Can I get a home loan for overseas property?
You can't get a home loan from an Australian bank for a property in another country; Australian banks and lenders only lend to people buying within Australia. However, some Australian banks will put you in touch with their international branches if they exist, or you can reach out to a foreign bank directly.
A home loan from an international bank or lender will follow that country's application process, which may be different to here.
5. Is an apartment a good investment?
Investing in apartments can be riskier than investing in a freestanding home, but it all depends on a variety of factors, especially location. Apartments can be easier to rent out than standalone houses, but they often don't rise in value as much as houses.
As a general rule, properties with an element of scarcity and properties that are well-located will generally make a good investment. Consider the services of a buyer's agent for expert personal advice on property investment.
Savings.com.au’s two cents
Rentvesting can be a good strategy to help you build your future position through property ownership while maintaining a certain quality of life. The one big health warning to be heeded here is that the success of this strategy is almost always reliant upon solid growth in property values over the period of your investment.
Bear in mind that this method of entering the property market is not for everyone. Be sure to understand how investing in real estate works and determine if rentvesting could work well for you based on your own time frames and financial objectives. As is always the case, don’t be hesitant to seek professional advice.
The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered which includes retail products from at least the big four banks, the top 10 customer-owned institutions and Australia’s larger non-banks:
- The big four banks are: ANZ, CBA, NAB and Westpac
- The top 10 customer-owned Institutions are the ten largest mutual banks, credit unions and building societies in Australia, ranked by assets under management in November 2019. They are (in descending order): Credit Union Australia, Newcastle Permanent, Heritage Bank, Peoples’ Choice Credit Union, Teachers Mutual Bank, Greater Bank, IMB Bank, Beyond Bank, Bank Australia and P&N Bank.
- The larger non-bank lenders are those who (in 2019) has more than $9 billion in Australian funded loans and advances. These groups are: Resimac, Pepper, Liberty and Firstmac.
Some providers' products may not be available in all states. To be considered, the product and rate must be clearly published on the product provider's web site.
In the interests of full disclosure, Savings.com.au and loans.com.au are part of the Firstmac Group. To read about how Savings.com.au manages potential conflicts of interest, along with how we get paid, please click through onto the web site links.
*The Comparison rate is based on a $150,000 loan over 25 years. Warning: this comparison rate is true only for this example and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate.
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